Starting a small business is risky enough, but during tough economic times the health and operating practices of others can dramatically impact your bottom line. Recent research by The McKinsey Quarterly found that three-quarters of respondents believed supply chain risk had increased over the past five years. The need to identify weak links is clearly becoming a critical element to attracting new business.
Traditional Areas of Concern
In the past, supply chain risk primarily focused on the big three areas of cost, quality and delivery. Although these remain important areas of concern, the complexity of doing business in an increasingly diverse environment has led to the realization of new and emerging threats. Today’s risk management experts must address environmental, legislative, economic and geographic factors in order to derive a complete understanding of supply chain risk.
Examples of Emerging Threats
Think your business is insulated from supply chain risk? Following are just a few of the more common examples of emerging threats that could adversely impact your operations when a critical supplier, vendor or contractor is involved.
Environmental: From natural disasters to man-made crises, the disruption of business or distribution patterns can quickly take a toll, especially for those that rely upon technology or just-in-time deliveries.
Economic: Rampant speculation, a volatile stock market and other economic turmoil in one industry can dramatically impact business in other areas. Everything from access to credit lines to buyouts and bailouts may result in unanticipated changes to your own operations.
Legislation: Perhaps one of the most wide-reaching forms of supply chain risk involves legislation. Zoning, taxes, pollution, tariffs and even exchange rates pose substantial risk, not to mention outright violations or other illegal activities.
How to Manage Risk
Managing supply chain risk may seem daunting at first. After all, you don’t have full control over how others conduct business. However, there are practical steps that can reduce risk without breaking the bank.
1. Establish Operational Standards: Make it a priority to review the business practices and insurance status of suppliers, vendors and contractors in advance. Take time to examine rating and credit data, litigation history and D&B rankings. Insist upon proof of insurance for critical areas or staff before doing business.
2. Have a Contingency Plan in Place: Do a critical evaluation of core business practices and then search for ways to conduct business in the event of a disaster. Common examples may include the ability to work from home for a limited period of time and sourcing temporary/alternative suppliers and other methods of remaining productive during a crisis.
3. Understand Available Insurance Options: Last but not least, ask your insurance agent about specialized forms of insurance that can provide valuable protection against various threats and supply chain risk. Depending upon your specific industry, there are a multitude of policy options available for almost any situation.